Israeli Finance Minister Yair Lapid has presented the
Israeli government with his ministry’s final budget proposal for 2013-2014,
outlining aggressive cuts and a series of new taxes meant to help cover some of
the Israel’s 39 billion shekel ($11 billion) deficit.

The Israeli government budget proposal cuts 25 billion
shekels ($7 billion) from government spending in 2013-2014, including 7 billion
shekels ($2 billion) this year and 18 billion shekels ($5 billion) in 2014.

Some 4 billion shekels ($1 billion) will be cut from
defense spending, as well as 2 billion shekels ($560 million) from education
and transportation, over the two years. Additional cuts, yet to be determined,
will be made from the Israeli government welfare and health budgets.

As part of Lapid’s deal with Histadrut labor federation
Chairman Ofer Eini, negotiated to avoid a general strike that could potentially
shut the Israeli economy down, a 2 billion shekel cut and wage freeze planned
for the public sector will be revised. Finance Ministry and Histadrut officials
are still negotiating the final agreement, which Lapid and Eini are expected to
sign next week.

One of the biggest bones of contention in the proposed Israeli
government budget is the Finance Ministry’s plan for a 3 billion ($841 million)
cut in child allowances and day care subsidies. The bill proposes cutting child
benefits from 175 shekels ($50) to 140 shekels ($39) per month per child.

Knesset members from all factions are expected to oppose
the child allowance cut vigorously. But the Finance Ministry has already
prepared two compromises to help win it a favorable vote: If the proposed child
allowance cut meets what ministry sources define as “mere opposition,” the
benefit will be cut to 150 shekels ($42) instead of 140 shekels. And if the cut
meets fierce opposition that might jeopardize the entire budget bill, the child
benefit will be set at 160 shekels ($45) per month.

“Every minister has already declared their ministry a
disaster zone, which is fine,” Lapid said on Monday, adding he was ready to “deal
with whatever pressure is exerted on me.”

The proposed Israel government budget also calls for an
unprecedented series of new taxes, which the Finance Ministry believes will
yield the state some 20 billion shekels ($562 million) in revenue over the next
18 months. Value added tax (VAT) will increase from 17 to 18 percent as early
as June, which will automatically drive up public transportation prices in
Israel, as well as the prices of most goods and services.

Despite raging opposition, the Finance Ministry also
plans to cancel various value added tax exemptions afforded to the Israeli
Tourism Industry, although it has yet to announce its final decision about
revoking the VAT exemptions given to the southern resort city of Eilat, whose
economy is almost completely dependent on tourism.

The Finance Ministry also plans to raise income taxes by
1.5 percent from January 2014 for those earning more than 5,000 shekels
($1,400) a month, a move that is expected to cost the average Israeli family an
extra 3,000 shekels ($840) a year.

The ministry also plans a 0.5 percent rise in the health
tax for high-income earners.

Other taxes include revoking the health tax exemption
afforded to housewives; imposing a 20 percent tax on alcoholic beverages and
higher taxes on cigarettes; introducing a new, 25 percent land betterment tax
for individuals who own more than one apartment; and imposing a 35 percent tax
on pension plans for those earning over 15,000 shekels ($4,200) a month.

Lapid decided to increase corporate income tax by 1
percent to 26 percent, and to impose a uniform 15 percent tax bracket for all
major corporations. But companies that operate outside central Israel will be
excluded and will remain in their current 10 percent tax bracket.

An Israel Tax Authority report released on Monday said
that the scaled corporate tax employed by the Finance Ministry in previous
years, in an effort to encourage capital investment in the private sector, resulted
in a staggering 70 percent tax break for the four largest corporations in
Israel between 2003 and 2010.

The four companies, which were not named in the report,
paid only 3.3 percent in taxes, effectively receiving a 5.6-billion shekel
($1.56 billion) tax break in 2010 alone. According to the report, the Israeli
government will lose nearly 10 billion shekels ($2.78 billion) in 2013 in a
similar scheme.

“This is outrageous, but it’s a law that was passed by
the Knesset and must be upheld. We will initiate a dialogue with the major
corporations and we'll see what can be done to change the rules of the game,”
Lapid said.

Speaking at a Calcalist financial conference on Monday,
Lapid said, “The middle class is not upset because it has to pay taxes to
support those who are less privileged. They are upset because they feel, and
justifiably so, that for many years their hard-earned money has been snubbed;
that instead of helping the weak, those taxes funded certain sectors,
irresponsible tycoons and unnecessary government ministries. It’s our job to
change that and create a just system.”

Lapid also criticized the “tycoons, big unions and
certain sectors that are willing to do anything it takes not to be taken for
fools... but have no problem making a fool of the middle class.”

On Tuesday, Lapid stressed that his proposed austerity
measures were short-term, saying, “This is what leadership and taking
responsibility are all about. We knew this was going to be hard and we know
people are angry, but we can’t be blindsided by anger when the other option spells
the economy’s collapse.”

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